TAIPEI, Taiwan -- In response to the fast accumulation of yuan deposits in Taiwan, Zhou Xiaochuan (周小川), governor of the People's Bank of China (PBOC) — mainland China's central bank — said recently that the purpose of allowing offshore yuan business is to encourage substantial economic activities, instead of being used as a financial tool only.

More and more Taiwanese are now accumulating yuan for the purpose of making interest and exchange profits. Zhou's statement indicated the central bank of China is not very satisfied with how the currency is utilized in Taiwan.

As the value of the currency continues to rise, people in Taiwan have been converting their assets into yuan, leading the currency to reach a total accumulation of nearly 250 billion in offshore banking units and domestic banking units.

When asked by the press how he perceives the fast accumulation of yuan in Taiwan, Zhou said that he hopes the offshore yuan business will proceed at a steady pace. "It is safer to proceed at a stable pace, without causing problems. If we proceed too hastily, it might cause unsteadiness in other related businesses," Zhou said.

Contribute to Substantial Economic Activities

Zhou stressed that the offshore yuan business should contribute to "substantial economic activities," meaning that trades conducted overseas and between third parties would be transacted in yuan and not restricted to cross-strait trade clearance. In addition, the central bank of China would like to see more direct investment made in yuan.

In response to a Hong Kong reporter's question regarding whether the central bank intends to lift the ceiling of 2 million yuan exchange per person per day. Zhou said that since the issue was only raised last summer, it would take some time for the central bank to deliberate on the issue. The 2 million ceiling was originally considered a lax constraint, Zhou added.

Yuan Value Enters a Bumpy Ride

Some pointed out that the exchange rate for yuan has fluctuated wildly. Zhou said in response that the yuan exchange rate is a very complex question. Various theories exist on the market to explain its current state, and "this is very normal, and it shows that the market is having more impact on the currency," Zhou said.

The exchange rate of yuan against the U.S. dollar yesterday reached its lowest point this year. Local economists pointed out that now that the currency is freely exchanged, investors should keep in mind that yuan will not appreciate forever.

China's trade performance has changed from the 2005-2008 period. The country's trade surplus and exports are not doing as well as they used to be, said Gordon Sun (孫明德), deputy director of the Taiwan Institute of Economic Research's macroeconomic forecasting center, adding that the exchange rate of yuan will see more fluctuation in the future, instead of always appreciating.

Yuan started the appreciation trend in 2005, and only began to depreciate recently. Many believe that the government of China will further relax the yuan exchange practice. Some analysts said the fluctuation is set to occur before the relaxation, but the currency will continue to appreciate in the long-term.